Abstract

Decentralization of policy provision is omnipresent yet we are not able to sufficiently account for the extent of this phenomenon. The decentralization theorem explains the decentralization of policy provision as a trade–off between heterogeneous preferences, inter–jurisdictional spillovers (externalities) and economies of scale. Empirical tests of the theorem have been hampered by a measurement problem on the independent as well as on the dependent variable. This article tackles these problems by using a new dataset which combines a measure of externalities and scale effects of policies obtained from an expert survey with the actual provision of policies across governmental tiers in 40 countries. The analyses show that decentralization of policy provision is not solely determined by functional characteristics of policies but that heterogeneous preferences and other country specific variables such as democracy, economic development and European subsidies, also play a significant role. Hence, this article provides an empirical test of the decentralization theorem.